Thursday, April 16, 2009

Spreads were mixed in the US today (amid low volumes) with IG tighter, HVOL improving, ExHVOL weaker (as HVOL arb helped), XO stronger, and HY rallying. Indices typically underperformed single-names (for the fourth day in a row as index arb remains active) with skews mostly narrower as IG underperformed but narrowed the skew, HVOL underperformed but narrowed the skew, ExHVOL intrinsics beat and narrowed the skew, XO underperformed but compressed the skew, and HY's skew widened as it underperformed.

The names having the largest impact on IG are Hartford Financial Services Group (-68.28bps) pushing IG 0.51bps tighter, and Yum! Brands Inc (+2.5bps) adding 0.02bps to IG. HVOL is more sensitive with Hartford Financial Services Group pushing it 2.34bps tighter, and Motorola Inc. contributing -0.18bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Avnet Inc. (-25bps) pushing the index 0.25bps tighter, and Yum! Brands Inc (+2.5bps) adding 0.03bps to ExHVOL.

The price of investment grade credit rose 0.09% to around 96.79% of par, while the price of high yield credits rose 0.13% to around 75.63% of par. ABX market prices are higher (improving) by 0.05% of par or in absolute terms, 0.26%. Broadly speaking, CMBX market prices are higher (improving) by 0.05% of par or in absolute terms, 0.14%. Volatility (VIX) is down 0.38pts to 35.79%, with 10Y TSY selling off (yield rising) 6.8bps to 2.84% and the 2s10s curve steepened by 2bps, as the cost of protection on US Treasuries fell 0.3bps to 43.5bps. 2Y swap spreads widened 2bps to 57.5bps, as the TED Spread widened by 1.4bps to 0.99% and Libor-OIS improved 0.6bps to 91.5bps.

The Dollar strengthened with DXY rising 0.17% to 85.227, Oil rising $0.76 to $50.01 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 3.32% today (a 1.71% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $15.3 to $875.75 as the S&P rallies (859.6 1.31%) outperforming IG credits (174bps 0.09%) while IG, which opened wider at 176.25bps, underperforms HY credits. IG11 and XOver11 are -4.5bps and -25.12bps respectively while ITRX11 is -5.09bps to 148bps.

The majority of credit curves steepened as the vol term structure flattened with VIX/VIXV rising implying a more bullish/less volatile short-term outlook (normally indicative of short-term spread compression expectations).

Dispersion fell -9.7bps in IG. Broad market dispersion is a little greater than historically expected given current spread levels, indicating more general discrimination among credits than on average over the past year, and dispersion increasing more than expected today indicating a less systemic and more idiosyncratic spread widening/tightening at the tails.

60% of IG credits are shifting by more than 3bps and 67% of the CDX universe are also shifting significantly (more than the 5 day average of 64%). The number of names wider than the index increased by 1 to 49 as the day's range rose to 7.5bps (one-week average 9.4bps), between low bid at 170.5 and high offer at 178 and higher beta credits (-5.51%) outperformed lower beta credits (-3.7%).

In IG, wideners were outpaced by tighteners by around 8-to-1, with only 7 credits wider. By sector, CONS saw 11% names wider, ENRGs 6% names wider, FINLs 10% names wider, INDUs 0% names wider, and TMTs 0% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 148.88bps and the latter at 151.55bps.

Cross Market, we are seeing the HY-XOver spread decompressing to 455.03bps from 435.34bps, and remains above the short-term average of 441.37bps, with the HY/XOver ratio rising to 1.55x, above its 5-day mean of 1.51x. The IG-Main spread decompressed to 26bps from 22.91bps, and remains above the short-term average of 23.67bps, with the IG/Main ratio rising to 1.18x, above its 5-day mean of 1.15x.

In the US, non-financials underperformed financials as IG ExFINLs are tighter by 8.2bps to 151.5bps, with 91 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 11.82bps to 206.88bps, with Finance names (worst) tighter by 17.6bps to 943.38bps, Banks (best) tighter by 18.08bps to 269.25bps, and Brokers tighter by 15.13bps to 247.08bps. Monolines are trading wider on average by 104.14bps (3.77%) to 2703.54bps.

In IG, FINLs underperformed non-FINLs (4.1% tighter to 5.13% tighter respectively), with the former (IG FINLs) tighter by 19.5bps to 454.8bps, with 17 of the 21 names tighter. The IG CDS market (as per CDX) is -2.3bps rich (we'd expect LQD to outperform TLH) to the LQD-TLH-implied valuation of investment grade credit (176.32bps), with the bond ETFs outperforming the IG CDS market by around 4.98bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 4.35bps to 148.88bps (with ITRX FINLs -trending tighter- better by 8.04 to 144.5bps) and is currently trading tight to its week's range at 0%, between 162 to 148.88bps, and is trending tighter. Main LoVOL (sideways trading) is currently trading tight to its week's range at -0.06%, between 109.66 to 104.74bps. ExHVOL underperformed LoVOL as the differential decompressed to -3.68bps from -4.94bps, but remains above the short-term average of -7.38bps. The Main exFINLS to IG ExHVOL differential compressed to 47.83bps from 53.34bps, but remains below the short-term average of 55.87bps.

Spreads were mixed in the US today (amid low volumes) with IG tighter, HVOL improving, ExHVOL weaker (as HVOL arb helped), XO stronger, and HY rallying. Indices typically underperformed single-names (for the fourth day in a row as index arb remains active) with skews mostly narrower as IG underperformed but narrowed the skew, HVOL underperformed but narrowed the skew, ExHVOL intrinsics beat and narrowed the skew, XO underperformed but compressed the skew, and HY's skew widened as it underperformed.

The names having the largest impact on IG are Hartford Financial Services Group (-68.28bps) pushing IG 0.51bps tighter, and Yum! Brands Inc (+2.5bps) adding 0.02bps to IG. HVOL is more sensitive with Hartford Financial Services Group pushing it 2.34bps tighter, and Motorola Inc. contributing -0.18bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Avnet Inc. (-25bps) pushing the index 0.25bps tighter, and Yum! Brands Inc (+2.5bps) adding 0.03bps to ExHVOL.

The price of investment grade credit rose 0.09% to around 96.79% of par, while the price of high yield credits rose 0.13% to around 75.63% of par. ABX market prices are higher (improving) by 0.05% of par or in absolute terms, 0.26%. Broadly speaking, CMBX market prices are higher (improving) by 0.05% of par or in absolute terms, 0.14%. Volatility (VIX) is down 0.38pts to 35.79%, with 10Y TSY selling off (yield rising) 6.8bps to 2.84% and the 2s10s curve steepened by 2bps, as the cost of protection on US Treasuries fell 0.3bps to 43.5bps. 2Y swap spreads widened 2bps to 57.5bps, as the TED Spread widened by 1.4bps to 0.99% and Libor-OIS improved 0.6bps to 91.5bps.

The Dollar strengthened with DXY rising 0.17% to 85.227, Oil rising $0.76 to $50.01 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 3.32% today (a 1.71% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $15.3 to $875.75 as the S&P rallies (859.6 1.31%) outperforming IG credits (174bps 0.09%) while IG, which opened wider at 176.25bps, underperforms HY credits. IG11 and XOver11 are -4.5bps and -25.12bps respectively while ITRX11 is -5.09bps to 148bps.

The majority of credit curves steepened as the vol term structure flattened with VIX/VIXV rising implying a more bullish/less volatile short-term outlook (normally indicative of short-term spread compression expectations).

Dispersion fell -9.7bps in IG. Broad market dispersion is a little greater than historically expected given current spread levels, indicating more general discrimination among credits than on average over the past year, and dispersion increasing more than expected today indicating a less systemic and more idiosyncratic spread widening/tightening at the tails.

60% of IG credits are shifting by more than 3bps and 67% of the CDX universe are also shifting significantly (more than the 5 day average of 64%). The number of names wider than the index increased by 1 to 49 as the day's range rose to 7.5bps (one-week average 9.4bps), between low bid at 170.5 and high offer at 178 and higher beta credits (-5.51%) outperformed lower beta credits (-3.7%).

In IG, wideners were outpaced by tighteners by around 8-to-1, with only 7 credits wider. By sector, CONS saw 11% names wider, ENRGs 6% names wider, FINLs 10% names wider, INDUs 0% names wider, and TMTs 0% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 148.88bps and the latter at 151.55bps.

Cross Market, we are seeing the HY-XOver spread decompressing to 455.03bps from 435.34bps, and remains above the short-term average of 441.37bps, with the HY/XOver ratio rising to 1.55x, above its 5-day mean of 1.51x. The IG-Main spread decompressed to 26bps from 22.91bps, and remains above the short-term average of 23.67bps, with the IG/Main ratio rising to 1.18x, above its 5-day mean of 1.15x.

In the US, non-financials underperformed financials as IG ExFINLs are tighter by 8.2bps to 151.5bps, with 91 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 11.82bps to 206.88bps, with Finance names (worst) tighter by 17.6bps to 943.38bps, Banks (best) tighter by 18.08bps to 269.25bps, and Brokers tighter by 15.13bps to 247.08bps. Monolines are trading wider on average by 104.14bps (3.77%) to 2703.54bps.

In IG, FINLs underperformed non-FINLs (4.1% tighter to 5.13% tighter respectively), with the former (IG FINLs) tighter by 19.5bps to 454.8bps, with 17 of the 21 names tighter. The IG CDS market (as per CDX) is -2.3bps rich (we'd expect LQD to outperform TLH) to the LQD-TLH-implied valuation of investment grade credit (176.32bps), with the bond ETFs outperforming the IG CDS market by around 4.98bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 4.35bps to 148.88bps (with ITRX FINLs -trending tighter- better by 8.04 to 144.5bps) and is currently trading tight to its week's range at 0%, between 162 to 148.88bps, and is trending tighter. Main LoVOL (sideways trading) is currently trading tight to its week's range at -0.06%, between 109.66 to 104.74bps. ExHVOL underperformed LoVOL as the differential decompressed to -3.68bps from -4.94bps, but remains above the short-term average of -7.38bps. The Main exFINLS to IG ExHVOL differential compressed to 47.83bps from 53.34bps, but remains below the short-term average of 55.87bps.